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The legal industry is changing in ways that very few lawyers understand. I recently tried to explain these changes to a savvy nonlawyer, non-American audience through an essay I published in the Cayman Financial Review, entitled, "Losing the Law Business" (original PDF). I wanted to share this analysis first with an audience that was, frankly, not emotionally or financially wedded to the outcome--hence, they could be objective. Now I want to gauge the U.S. lawyer reaction, so I am republishing the essay here on The Legal Whiteboard.

Losing the Law Business, Cayman Financial Review (Jan. 2013)

by William D. Henderson

If you are not
a lawyer, you may find this next sentence very good news. We are entering a period in human history in
which we are going to need fewer lawyers, at least the traditionally trained
variety. The world is becoming more
interconnected, regulated and complex. Although
regulation and complexity have historically been very good for the lawyer
business, something very fundamental is changing. Clients are increasingly struggling to pay
the bills of artisan lawyers who prefer to craft individual, customized
solutions for each transaction and each dispute.

In essence, law
is facing a productivity imperative. To
cope with globalization, the world needs better, faster, and cheaper legal
output. The artisan trained lawyer just
can’t keep up. To address the
productivity imperative – or, more accurately, to turn a profit from this
business opportunity—a new generation of legal entrepreneurs has emerged.

Lawyers
continue to have a lock on advocacy work and client counseling on legal
matters. But an enormous amount of work
that leads up to the courthouse door, or the client counseling moment, is
increasingly being “disaggregated” into a series of tasks that does not need to
be performed by lawyers. Indeed, it may
be best performed by computer algorithms.
Further, the entire process is amenable to continuous improvement,
driving up quality and driving down costs.
This is a job that is likely more suitable for a systems engineer,
albeit one with legal expertise, than a traditionally trained lawyer.

Although this
change may sound radical, it is actually the logical next step in an evolutionary
progression that began in the early 20th century as the practicing
bar transitioned from generalist solo practitioners to specialized lawyers
working together within law firms. Now,
as clients search out ways to stretch their legal budgets, specialization is
losing market share to process-driven solutions, akin to how Henry Ford’s
assembly line methods supplanted craft production.

To illustrate
this progression, consider the U.S. legal market at the beginning of the
post-War period. At that time, 61% of
all lawyers worked as solo practitioners. Not surprisingly, incomes were
low. In 1948, the average lawyer in
private practice made $5,200 per year, which was several hundred dollars less
than his government lawyer counterpart.
There were private practice lawyers, however, who defied this trend. Less than 2% of U.S. lawyers worked as
partners in law firms of nine partners or more, but these “large” firm lawyers
made, on average, five times more than their solo practitioner peers.

Why so much
more? Because the world was becoming
more regulated and complex. And
sophisticated, specialized lawyers with deep technical expertise were in short
supply. By combining into a firm,
lawyers could specialize in new or existing areas of law, handle bigger and
more complex matters, and otherwise coordinate their efforts to better serve clients. Indeed, the most successful large law firms,
such as the New York City firm of Cravath Swaine & Moore, organized
themselves so as to optimize the training of junior lawyers in both substantive
law and the ability to supervise and delegate (the “Cravath system”). Fittingly, during the 1930s, the press dubbed
these firms “law factories.” The best
junior lawyers eventually became partner; the rest obtained the benefit of
excellent experience and training, thus obtaining jobs with clients or partnerships
with other law firms.

For the next
several decades, firms with significant business clients and a
partner-associate training model tended to prosper. As a measure of longevity of the specialist
model, among the largest 100 law firms in the U.S. as measured by gross
revenues (the AmLaw 100), the average name partner was born in 1895 and died in
1964 – yet the growth has marched on for another half century. The period of greatest financial success has
occurred during the last three decades.
Between 1978 and 2003, total U.S. legal expenses as a percentage of GDP
increased from .4% to 1.8%. From this
growing pie, large firm lawyers where getting the biggest slice. By the mid-2000s, the profit share of the average
partner in an Am Law 100 firm was over $1 million per year.

One obvious
drag on the legal industry’s reluctance to embrace innovation is the financial
success enjoyed under the old model. It
is hard to convince a group of millionaires that their business model is
broken. A second drag is insularity. The U.S./U.K system of lawyering is premised
on the idea of independence. In the
U.S., ethics rules prohibit lawyers from splitting fees with nonlawyers. Thus, only lawyers have an equity interest in
law firms. In the U.K. and Australia, in
contrast, the ban on fee-splitting has been significantly relaxed, enabling the
public listing of law firms and the entry of name-brand companies, such as
Tesco (a supermarket retailer), into the consumer legal business.

Ironically, the
insularity of the U.S. legal market may have created a more attractive target
for capitalists. Among corporate clients, the combination of high law firm
profits and low innovation has created discontent among C-suite executives. They ask their general counsel, “why are legal
expenses going up faster than other departments? What value are we getting for these higher
fees?” The general counsel has no
persuasive reply.

Perhaps the
best example of new entrepreneurs serving corporate clients is the large number
of vendors working in eDiscovery and document review. The explosion in digital
data over the last 10 to 15 years has made it untenable to continue using
expensive law firm associates for an exhaustive manual review.

Initially the
work went to registry services, which assembled large crews of temporary low-wage
“contract” lawyers for large document review projects. After building a sufficient data
infrastructure and security controls, the work flow has gradually expanded to
legal process outsourcers (LPOs) in places like India, where a fraction of the
wages paid to U.S. contract attorneys could attract highly motivated and able
Indian lawyers. Having achieved
sufficient success and scale, the best LPOs are now turning to process
engineering, combining this highly motivated and able labor with superior technology
and workflow design.

More recently,
new vendors have emerged who specialize in “predictive coding.” In a case that considered acceptable methods
of conducting electronic discovery, a federal judge in New York City reviewed
studies comparing the cost and accuracy of computer-based machine algorithms
(predictive coding) with manual human review.
Finding that the predictive coding was at least as accurate as manual
methods and reduced the number of documents for human review by a factor of 50,
the judge ruled that predictive coding was judicially reasonable in many cases
involving large numbers of documents.

Although many
large U.S. law firms may perceive document review as “commodity” legal work not
worthy of their efforts, the new legal vendors getting into this space are
remarkably well capitalized. For
example, one of the larger suppliers of contract attorneys is Robert Half,
which has 26 locations through the U.S. and Canada. Its corporate parent, Robert Half
International, is publicly traded on the New York Stock Exchange (RHI). Another company in the contract attorney
space is Special Counsel, which has 36 U.S. offices. Special Counsel is a subsidiary of Adecco
Group, which is listed on the SIX Swiss Stock Exchange (ADEN).

In the LPO
space, Pangea3, which opened in 2004 with $1.5 million in venture capital, was sold
in 2010 to Thomson Reuters (NYSE symbol TRI) for an amount reported to be in
the $35M to $40M range. [ed: I later learned from a highly reliable source that the true price was just under $100M.] The original
management team was kept intact, as the company has been growing between 40%
and 60% every year since its founding.
The company now employs over 850 lawyers, mostly in India. Because of its emphasis on process
improvement, Pangea3 and other high-end LPOs are obtaining a competitive
advantage beyond mere wages. Thus, LPOs
have become a much more attractive option for Indian law graduates. Another competitor is Huron Consulting Group
(NASDAQ symbol HURN), which recently announced a new document review facility
in Gurgeon (a booming suburb of Delhi), bringing its total global document
review workforce to 1,500 in 17 offices worldwide. Since 2007, Huron Consulting Group’s annual
revenues have nearly doubled, growing from $315 million to $606 million.

The major
players in the predictive coding space are also well capitalized. One of the leaders is Recommind, a privately
held company with $15 million in revenues in 2011 and approximately 100
employees in facilities in California, London, Germany and Australia. Similarly, Kroll Ontrack, which started in
the hard disk recovery business nearly 30 years ago, has information management
services that include predictive coding as part of its broader eDiscovery services. Kroll Ontrack is owned by Kroll, Inc., which
was recently acquired by Altegrity, an information conglomerate owned by
Providence Equity Partners. Providence
Equity is a global private equity firm with over $27 billion under management.

Since 2008,
revenues in large U.S.-based law firms have been relatively flat. A recent article in Managing Partner magazine acknowledged that law firms are losing
market share to the LPOs –which broadly includes all the companies mentioned
above—as general counsel are increasingly contracting with LPOs directly. The savings are perceived to be in the 50% range
with no diminution in quality. According
to the article, the LPO business is estimated to be a $1 billion per year
industry that will double in size over the next two to three years.

Unlike traditional lawyers, the competitive advantage
enjoyed by these new entrants is that they have learned how to learn. If law is like other industries, these companies
will move up the value chain and find new ways to satisfy the needs of large
corporate legal departments. Law is not
just for lawyers anymore. This genie is
permanently out of its bottle.

Each year, the instructors in Indiana Law's 1L Legal Professions class coordinate with Indiana Law's Office on Career and Professional Development (OCPD) to run the Career Choices Speakers Series -- 16 lunchtime forums on Thursdays and Fridays throughout the second semester. It has been an enormous hit with students. Although our 1Ls are required to attend at least three, a huge proportion of the 1Ls attend over ten.

Below is a photo of this Thursday's pizza run for the session on Direct Service Public Interest Lawyers -- 22 pizzas and the laptop/scanner used for attendance. Over the course of semester, we will purchase well over 300 pizzas. Who pays for all of this food and equipment (plus about a dozen dinners for students and alums that occur before and after these events)? An Indiana Law alumni who profoundly believes in the role of ethics and integrity to achieve personal and professional success in life. And he has done so quietly, behind the scenes, every year for the last five.

I thought our alum would enjoy seeing the pizza gurney. Thank you! You are opening students' eyes and helping them make better decisions, all through relationships with other lawyers.

I was at the ReInvent Law Silicon Valley event last week. Following up on Jerry's thorough remarks, I can honestly say it was unlike any legal education and lawyer conference I have ever attended (the only thing close is Law Without Walls). There is a new guard in the legal academy taking shape, and it is led -- truly led -- by Dan Katz and Renee Knake at Michigan State.

Admittedly, Dan and Renee lean heavily toward my bias. Most of us law professors talk. Dan and Renee, in contrast, are doers. Shortly after becoming assistant professors, they each moved quickly from ideas to action to actually having the audacity to attempt to build new and relevant institutions. Moreover, they both did it untenured--Dan is only in his second year of teaching and Renee just cleared the tenure hurdle earlier this year. They did all of this without a net. To my mind, they are winning the "Game of Life." If other junior faculty follow their example, the legal academy is going to truly change. And right now, that is what we need.

One of my favorite Paul Lippe quotes is this, "In hindsight, the new solutions are all going to look obvious." ReInvent Law was 40 speakers tied together by a common interest in experimentation. Were all the ideas good? If history is any guide, and the criteria is moving from concept to implementation to financial and institutional sustainability, the answer is surely no. But it was invigorating to be in a room of doers who are all willing to risk failure. That is the courage and leadership we need right now. To me, it looked obvious that we need a place like ReInvent Law where insurgent ideas can be expressed with enthusiasm, even if only a handful or fewer will transform the legal landscape.

I was fortunate to be one of the presenters. Dan Katz was kind enough to take my picture when I gave my Ted-style talk (all the talks were Ted-style or "Ignite"). If you zoom-in on me, I look ridiculous. I am no showman. But you have to admit that the lighting is pretty spectacular. The green screen, by the way, is the running twitter feed, an idea that I can assure you was not stolen from the ABA or the AALS.

Amidst all these "revolutionary" ideas, I think my presentation was probably the most conservative. My central claim is that 100 years ago, as the nation struggled to find enough specialized lawyers to deal with the rise of the industrial and administrative state, some brilliant lawyers in cities throughout the U.S. created a "clockworks" approach to lawyer development. These clockworks filled the enormous skills and knowledge gap. Firms like Cravath, Swaine & Moore, through their "Cravath System," finished what legal educators started. (I use the Cravath System as my exemplar because its elegant business logic was written out so meticulously in the firm's 3-volume history.)

The whole purpose of the clockworks was to create a "better lawyer faster." This is a quote from volume II. The company I co-founded, Lawyer Metrics, incorporated it into our trademark -- the value promise is that compelling. See the slides below.

The original Cravath System circa 1920 demonstrated the power of a "clockworks" approach to lawyer development. The system was a meticulously designed and mechanized way to create specialized lawyers who could service the needs of America's rapidly growing industrial and financial enterprises -- lawyers who were in perennial short supply because the requisite skill set could only be learned by doing. The System endured for a century because it solved the specialized lawyer shortage by making every stakeholder better off -- junior lawyers (received training), partner-owners (large, stable profits), and clients (world class service and value).

Today's legal employers and legal educators would benefit by revisiting this system's powerful business logic. The clockworks approach to lawyer development still works. The only difference is that the specifications for a great lawyer have changed. Like the original Cravath System, a new clockworks would create a "better lawyer faster."

Legal futurist Richard Susskind, author of The End of Lawyers? and Tomorrow's Lawyers will headline the launch of Suffolk University Law School's Institute on Law Practice Technology and Innovation on April 18 in Boston, MA.

According to the school's announcement, "Professor Susskind will discuss some of the key concepts from his new book, offering a close look at where the profession is heading and what we'll find there -- a challenging new world for some, and a vibrant future for others."

The program will include a panel discussion on the implications of Susskind's remarks, moderated by Andrew Perlman, Suffolk Law Professor and Chief Reporter for the ABA Commission on Ethics 20/20. The panelists are Jordan Furlong, Partner at Edge International and Senior Consultant with Stem Legal, Krish Gupta JD '96, Senior VP & Deputy General Counsel at EMC Corp., and Regina Pisa, Chairman of Goodwin Procter LLP.

I had the privilege of attending ReInvent Law—Silicon Valley – on Friday, March 8. Special kudos go to Professors Renee Knake and Daniel Martin Katz from the Michigan State University College of Law and to the Ewing Marion Kauffman Foundation for sponsoring the event and bringing together a significant number of thought leaders who are engaged in thinking about how to use technology to improve the access to and the provision of legal services in the United States and globally.

There were too many presentations to try to summarize everything that was shared during the day. Nonetheless, there were a few themes that showed up throughout the course of the day that merit attention as we think about where the market for legal services might be headed.

First, several people made presentations focused on the increasing importance of data analytics, knowledge management and process management. These included Josh Becker of Lex Machina (discussing generating economic value from analyzing large volumes of patent litigation data), Kingsley Martin, of KMStandards and Sol Irvine of Yuson & Irvine (both discussing knowledge management relating to contract language to develop more efficient processes for drafting contracts), Karnig Kerkorian and Rudy Minasian of Velawsity (discussing process management tools to help solo practitioners by more efficient), and Sean McGrath of Propylon (discussing temporal data management tools that allow searchers to identity the effective language of regulations or statutes at a specific time) to name just a few.

Second, several people emphasized the need for broader access to legal services at affordable prices and discussed the use of process management and alternative structures to better meet the need for legal services for middle class people and small business owners. These included Stephanie Kimbro of Burton Law (encouraging unbundling of legal services and greater participation in branded networks), Chas Rampenthal of LegalZoom (imagining what legal services might look like if a major retailer decided to offer legal services), Raj Abhyanker of LegalForce (discussing process management and data management as key to growth of Trademarkia (predecessor to LegalForce)) and Charley Moore of RocketLawyer (discussing the needs of small business owners to have more affordable guidance regarding how to deal with regulatory structures and legal problems).

Third, related to the access question, there was significant discussion of the constraints of Rule 5.4 and the revolution taking place in the United Kingdom following the authorization of Alternative Business Structures for providing legal services. Presenters discussing the evolving legal services market in the United Kingdom included Ajaz Ahmed of Legal365.com (discussing a legal services market ripe for disruption from businesses focused on client service) and Andy Dawes of Riverview Law (discussing the growth of its fixed fee model of providing services to corporate clients).

In addition, our own Bill Henderson made a presentation on the training model that might be necessary to better prepare lawyers to be effective in the new normal, with greater emphasis on data analytics, knowledge management and process management in addition to traditional legal knowledge and relationship skills.

One of the most thought provoking presentations for me was the presentation by Colin Rule of Modria regarding the growth of Online Dispute Revolution. Modria is an outgrowth of the dispute resolution components of EBay and PayPal where 60 million disputes have been resolved in an “extrajudicial” context, with many being resolved only through use of software (without the intervention of other humans). This prompted me to realize that if one reconceptualizes the access to legal services issue as an access to justice issue, there may be a variety of more efficient ways to offer people access to justice that might completely bypass the current legal system.

There was much to think about regarding a legal services market that is facing the reality of disruptive innovation. What the conference highlighted for me is that change is happening and that there are a number of very bright, very thoughtful people who are trying to invent the future by taking advantage of data and technology to find better, more efficient, more affordable ways to provide legal services to a broader array of clients. Not all of the innovators in attendance at the conference are going to have an economically viable model, but some of them will, and that will mean some of them will be winners, and some of those who continue to do things the traditional way are going to be losers.